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Tuesday, 13 October 2015

BOOST YOUR PENSION - Class 3A

UPDATE 25 MARCH 2017
The take-up of this offer has been very low. To the end of January 2017 just 7600 people had bought extra pension. That compares with the original estimate of 265,000 when the policy was announced. 

The offer
The Government is offering millions of pensioners the chance to boost their state pension by up to £25  a week. The offer applies to everyone who is already entitled to a state pension or will be before 6 April 2016. That is all men born before 6 April 1951 and all women born before 6 April 1953.

The extra pension can be bought in units of £1 a week up to a maximum of £25 a week - an extra pension of £1300 a year. The cost depends on age. At age 65 each pound a week of pension costs £890. So for the full £25 a week you would pay £22,250. At 70 the cost is £779 per unit or £19,475 for the maximum £25. At 75 it is £674 or £16,850 for the full £25 a week. 

If you have a birthday coming up shortly it is worth waiting. For example at age 67 the cost is £21,175 for the full £25 a week. But if you wait for your next birthday the price falls by £500. So it is worth waiting if your birthday is less than 20 weeks away. The time varies depending on your age but about 20 weeks is a useful guide. 

Annuity comparison
The cost may seem high. But it is a much better deal than buying an annuity on the insurance market. A pension for life of £1300 a year at age 65 would cost a healthy single person around £37,000. A married person who wanted their widow or widower to have 50% of the annuity on their death would have to pay around £45,000. Put another way, for £22,250 a 65 year old could buy an extra pension of £790 or £630 with a 50% widow/er's pension. So £1300 a year is good value. That is because the Government has no costs for commission, sales, holding capital, or profits as commercial firms do.

But remember if you buy an annuity with money in a pension fund you have paid no tax on that and are taxed on the annuity. You cannot pay for the pension top-up from a pension fund. So if you do buy it you do that with savings that have already been taxed AND you pay tax on the income it generates. 

Inflation proofing
The extra pension starts the week after your money is received but it may take a few weeks to actually arrive in your payment. The extra pension is index-linked so it will rise each April in line with inflation measured by the CPI the previous September. The September 2015 CPI was -0.1% so there will be no rise in any deferred amounts from April 2016.

At least half the extra pension can be inherited by a spouse or civil partner. The amount depends on the age and sex of the one who dies first. In some cases the survivor can inherit all of the extra. 

Is it worth it?
The Government says the cost is 'actuarially neutral'. In other words by the time they die the average person would have had as much back in extra pension as they spent buying it. It is not clear on what basis that calculation was done. The price is the same for women and men. But as women live longer it is more likely they will get back more than the cost. On the other hand they are less likely to be survived by a spouse.  The healthier you are the longer the pension will last and the better the deal is. If you are unwell or you smoke then it may not be worth doing.

Tax and benefits
The extra pension is taxable. So the deal is not as good for anyone who pays tax and even worse for those who pay higher rates of tax. Ironically they are precisely the people who may have a spare £22,250 hanging around waiting to be used! They may be better just putting it into a cash ISA as and when they can, or into a normal savings account, and drawing it down at £1300 a year. Those withdrawals of their own capital are of course tax-free whereas the taxed additional pension would be worth £1040 after basic rate 20% tax, £780 after higher rate 40% tax, and £715 after additional rate 45% tax.

The most optimistic measure of life expectancy produced by the Office for National Statistics (called 'cohort') indicates that men aged 65 have an even chance of living for 21.4 years and women for 24.0 years. The break even point where the net income equals the outlay at 65 is 17.1 years (no tax), 21.4 years (basic rate tax), 28.5 years (higher rate tax) and 31.1 years (additional rate tax). 

If you get a means tested benefit such as pension credit, council tax support or housing benefit they will normally be reduced. In these cases the deal is unlikely to be worthwhile.

How to get it
The deal opened on 12 October and will close on 5 April 2017. You can buy the extra pension at once or in stages. If you change your mind you can get your money back and give up the extra pension within 90 days of paying.

The scheme is called State Pension Top-up (technically voluntary Class 3A National Insurance contributions!) and you can check what it would cost you and apply on the official gov.uk website or call 0345 600 4270. You will need proof of your ID and your National Insurance number if possible.

Further information: Link to the full table of the cost by age of each extra pound per week of pension.

Full DWP guide

21 November 2015
vs. 1.16